With
the Wipro results fresh from the oven now, let’s take a quick look at the
comparative performance of the Top 4 IT firms, viz. TCS, Infosys, Wipro and HCL
for the quarter ending 30’th September, 2013.
Infosys growth rate has stabilized over the last 4 quarters and
has returned to what I believe as the long term industry standard rate of ~3.5%
QoQ. This is a welcome change and indicates that the strategies that Infosys
has put in place are bearing fruit. However at the same time Infosys Operating
margins are the lowest amongst the Top 4 firms. And as its CFO indicated the
margins are likely to remain at this number in the ensuing quarters as well.
This when looked in tandem with the increase in SG&A by 2 percentage points
indicates that Infosys is at an Inflexion point where it has taken a decision
to move away from its most talked about strategy of industry leading margins so
as to boost investments in 'Sales' which will eventually propel growth.
TCS has been doing just the opposite. Its record breaking
operating margins exceeding 30% when looked in tandem with the QoQ growth rate
of 5.4% indicates that it has mastered the art of delivering high profits
together with high growth rates. The financial numbers for this quarter are the
best so far in the recent times for TCS. At the same time TCS has cut down its
SG&A by 2 percentage points over last quarter. It remains to be seen if the
lowering of investments in 'Sales' is a one off event or if will become a trend
in future. It also raises questions on whether its whopping operating margins
this quarter have been delivered by sacrificing its investment in
'Sales'. We need to ponder on whether the reduction in this investment is
because TCS feels it has made enough investments in Sales over the last few
years and whether keeping the investments at current levels will sustain the
velocity of TCS in the days to come.
HCL and Wipro have also reported a marginal increase
in their Operating margins over the last few quarters. The overall trend in the
IT Services industry this quarter points to increasing operating margins
(Infosys being an exception). However Wipro is still battling its
post-recession woes and will take time to recover from the same. HCL has
stabilized its QoQ growth rate at ~3.5% over the quarters and I believe this
will become the new normal for the IT services industry akin to the erstwhile
Hindu rate of growth for Indian economy.
The
biggest puzzle in the entire equation is Infosys. Has Infosys embarked
on a Cognizant like 'growth' strategy by funneling its profits into sales and
platforms? Will this strategy remain its long term direction or will this just
be an intermediate strategy to get growth back on track? Here is what I
believe Infosys should do. Every company has its own very unique DNA and can
produce the same results as competition by adopting different approaches. To an
outsider looking at Infosys it might appear as if Infosys has adopted a
Cognizant like low margin strategy as an interim strategy and once growth comes
back, it will switch to the TCS model of high growth and high profitability
co-existing together!!
This
might be true but what is more important is how Infosys pulls this off.
With the focus back on the large outsourcing deals it will be difficult to
sustain the high profits which Infosys once enjoyed as the market is
commoditized. While Infosys get back growth by leveraging this approach it will
see a short term erosion in its margins. In the background is the Infosys 3.0
strategy which will enable eventually Infosys to move up the value chain and
this reclaim its premium positioning in the market place. The market is not yet
ready for the Infosys 3.0 offerings and is still nascent. This might mean
Infosys might need to invest on educating the customers and prod them to try
their hands on transformational services in the initial few quarters. Once the
strategic and futuristic engine of Infosys (the consulting and transformation
engine) starts in full throttle then Infosys can continue on its high growth
rate and also get to regain its premium pricing advantage. This together with a
cost optimization strategy which Infosys should pursue with full rigour will
enable it to boost the margins and replicate TCS like financial performance in
the years to come. A recent article in HBR which talks about the “Big 5”
consulting firms at the cusp of disruption clearly indicates a possibility of
IT firms like Infosys or Cognizant or TCS capturing a good chunk of the
consulting business that was once limited to a hallowed few firms. This
validates that Infosys 3.0 though ahead of the times is the right thing for
Infosys to do to be successful.
RESULTS
FOR QUARTER ENDING SEPTEMBER 30, 2013:
The
summary of the Q2, FY14 comparative analysis for Infosys, TCS, Wipro and HCL is
as follows:
1.
TCS leads in terms
of QoQ Revenue growth at 5.4% with Infosys following at 3.8%, HCL at 3.5% and
Wipro trailing at 2.7%
2.
TCS leads in YoY
Revenue growth at 17% with Infosys following at 15%, HCL at 14.1% and
Wipro trailing at 5.9%
3.
HCL leads in terms
of QoQ Operating Profits growth at 18.2%, with TCS following at 17.6%, Wipro at
15.5% and Infosys trailing at -3.6%
4.
HCL leads in terms
of YoY Operating Profits growth at 42.5% with TCS following at 32%,
Wipro at 15.1% and Infosys trailing at -4.4%
5.
TCS leads in terms
of Operating Profits as a % of revenues at 30.2% with HCL following at 23.8%,
Wipro at 22.5% and Infosys trailing at 21.8%
6.
TCS leads in
terms of SG&A expenses as a % of revenues at 17.8% with Infosys following
at 13.5% and HCL at 12.7%
Following
is a chart showing the comparative analysis of these top firms on various
financial parameters:
|
Q2, FY14
|
||||
|
Parameter
|
Infosys
|
TCS
|
Wipro
|
HCL
|
|
Q2 Revenues(M USD)
|
2066
|
3337
|
1631.1
|
1270.3
|
|
QoQ
Growth
|
3.8%
|
5.4%
|
2.7%
|
3.5%
|
|
YoY
Growth
|
15.0%
|
17.0%
|
5.9%
|
14.1%
|
|
Q2 Operating Profits(M USD)
|
451
|
1007
|
367
|
302.3
|
|
QoQ
Growth
|
-3.6%
|
17.6%
|
15.5%
|
18.2%
|
|
YoY
Growth
|
-4.4%
|
32.0%
|
15.1%
|
42.5%
|
|
As
% of Revenues
|
21.8%
|
30.2%
|
22.5%
|
23.8%
|
|
Q2 Net Profits(M USD)
|
383
|
748
|
NA
|
225.6
|
|
QoQ
Growth
|
-8.4%
|
12.0%
|
NA
|
6.6%
|
|
YoY
Growth
|
-11.1%
|
16.3%
|
NA
|
42.8%
|
|
As
% of Revenues
|
18.5%
|
22.4%
|
NA
|
17.8%
|
|
Q2 SG&A Expenses
|
278
|
595
|
NA
|
161
|
|
As
% of Revenues
|
13.5%
|
17.8%
|
NA
|
12.7%
|
*Wipro does not give
P&L for Global IT services separately. There is a single P&L for Wipro
Limited
I will be back with more updates
once Cognizant comes out with its quarterly results on November 5, 2013. Please
do feel free to post your feedback on my views…
Note: The
views expressed in the article above are purely the personal views of the
author and have nothing to do with the firm he works for
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